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(your email address) - where the real estate investor market is always hot. With real estate credit virtually non-existent, facilitating a direct 1031 exchange between property owners is a great alternative. is the oldest, most trusted, and fastest-growing online exchange website for the trading or property swap of commercial real estate properties.

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When -   When cash., paper, or property is offered to you in an exchange but you do not wish to accept it for tax or other reasons
Situation -   Jones owns a 20 acre parcel at the edge of town which has increased in value from the $20,000 he paid for it 20 years ago to a million dollars at the present time. He is offered a million dollars cash for the property and finds that he would be taxed on $980,000 of gain. Even using capital gains, he finds that his tax could be as much as $300,000. Jones does not wish to pay this kind of tax on the transaction.
How -   Jones can accept the cash offer providing other real estate acceptable to him is found “in lieu of” the cash offered. He can then find other property, which he would prefer having, on the market and use the million dollars to acquire that property. In this way, he avoids the large capital gain and can acquire another property which he wishes to keep.
Results -   Jones pays no tax in this transaction. Be extremely careful because if Jones can take the cash in this transaction at any time, he could be considered taxable by the IRS.

When -   Normally when a loan must be obtained in an exchange situation.
Situation -   Jones owns a lot valued at $50.1000 which is clear. He wishes to exchange that lot as a down payment on a $200,000 apartment building and wants to get a new $125,000 loan. The seller will carry back a $1,000 2nd after placement of the new loan. Lender is reluctant to make a loan in an exchange situation.
How -   The exchange is written up as an exchange with all details being covered. For financing purposes, the escrow or closing statements are written up as “two buy-sells”. Jones will buy Smith property for $200,000 with $50,000 cash down, a new loan to be gotten for $125,000, and the seller to carry back a $25,000 2nd with terms suitable to both parties. The seller, Smith, agrees to buy Jones’ property for $50,000 cash. Two escrows are opened and there will be two closings . When reporting the transaction to the IRS, the transaction can be reported as an exchange due to the fact that the IRS indicates that an exchange is mandatory. The buy-sells are only for financing purposes.
Results -   A transaction can be made smoothly. Most lenders understand that funds used as a down payment are often received in the sale of another property. The alternative is to have to have both properties appraised and have a confused loan officer.

When -   When cash is offered in a transaction and the acquiring party does not wish to take the cash and be taxable.
Situation -   Jones is offered a million dollars cash on a low basis property which he owns. Jones does not wish to take the cash and be taxable (this is a variation on the “in lieu of” formula).
How -   Jones accepts the cash “in lieu of other real estate” and does not take the cash but uses the cash to acquire other property which would be suitable to him.
Variation -   An installment sale can also be made when cash is offered by having a third party create a secured note with that party taking the cash giving Jones an installment bill.

When -   Jones has $100,000 in several mortgage notes he has carried back on real estate sales. All tax on these notes has been deferred. He will not enjoy the benefit of the $100,000 for several years and Jones understands the “time value of money”.
How -   Jones creates a $90,000 note, secured by these $100,000 in notes. The notes are retained by Jones but pledged as security for this $90,000 note. Payment on the $90,000 is $950.00 a month including 10% interest. This $90,000 note plus $5,000 cash is exchanged for a free and clear home or condo. (it can be done). Once acquired, Jones borrows 80% on the home ($79,000). He now retains $74,000 less costs, which is non taxable because his basis on the house is $95,000. He now sells the house for $95,000, $10,000 cash down and carries back a $6,000 2nd. He has now generated $84,000 in cash and a $6,000 2nd from his $90,000 in notes (about 93.3%) .
Variation -   If the house won’t sell for $95,000 and he drops to $89,000 and does not take back a 2nd, he will be able to show a $6,000 tax loss after generating 93.3% on the paper.

When -   If you own a property which you are unable to sell and on which you are unable to borrow, yet you need cash.
Situation -   Jones owns a $50,000 lot on which he is unable to borrow money and which he is unable to sell . He has offered to discount the price but to no avail.
How -   Jones creates a $35,000 note against the property ( it’s always a good idea to keep at least a 20% equity for safety) and exchanges his note for an item on which he can borrow. For instance it might be an automobile, a boat, a “cheapy” house, etc. Once that property is acquired, a loan can be obtained on it. Another variation would be to discount the note for cash. (Be extremely careful as this could be construed as usury in some instances.)

When -   If you are going to have a note payoff and you prefer not to receive the payoff but would rather have monthly payments continued.
Situation -   Jones had a $50,000 note which he learned was to be paid off within the next six months. Income tax on the note had been deferred so when Jones received the payoff, he would immediately be taxable to a large extent. Jones prefers to have monthly payments rather than to have the payoff on the note. In the meantime, he finds Smith who has a $50,000 (or series of notes) who is receiving good monthly payments but would like to have his cash. If Jones and Smith exchange their notes, they are immediately taxable.
How -   If Jones sells his note to Smith at a considerable discount) Jones would only be taxed on the amount that he receives for that note. In the mean time, if Smith sells his note to Jones at a discount, he would be taxed on the amount that he received. (Check this out with your accountant. It is conceivable you would still have a taxable situation!)

When -   When you have a loan against the property that makes that property un-saleable or difficult to exchange.
Situation -   Jones owned a $200,000 property with a $100,000 loan against it. He was unable to sell or exchange the property with the loan on it.
How -   Jones has other real estate with which he can secure that $100,000. He makes arrangements with the lender to walk the loan from this particular property over to one of his other properties clearing this property and making it much easier to sell or exchange.
Results -   Jones has a free and clear property to move now rather than one that is highly encumbered.

When -   When you’re acquiring a property that is supposed to have a certain income which the seller has told you the property will make.
Situation -   Jones is interested in acquiring a commercial rental that Smith owns. Smith tells him that he has a lease on the property for $1,000 per month. He has never had a vacancy and the property can be depended upon to bring in that amount of cash.
How -   Jones makes an offer on the property for $20,000 cash down with Smith to carry back an $80,000 mortgage which pays at $850 per month including interest at 10%. Jones writes into the mortgage that in the event the income on the commercial property falls below $1,000 per month, the payment will drop to $500 per month. Should the building become completely vacant, there is to be no payment and no interest to accrue. Smith takes the offer!
Results -   As long as the building performs, Smith will receive his payments. Should the building not perform as Smith indicates, Jones will not have to make the payments.

When -   In every instance where you receive a property in an exchange or purchase.
Situation -   Jones has just acquired a 20 acre parcel with a set of farm buildings in exchange. His basis on the property is $200,000. Jones plans on selling the land in the near future and retaining the buildings to live in.
How -   Jones allocates as much basis as possible to the land. There is always some leeway in making this allocation and if he can allocate $160,000 to the land and just $40,000 to the buildings, when he sells the land for $160,000 he will have had no gain. Since he is going to keep and live in the building, he can’t depreciate them anyway so, therefore, the basis on the buildings will not hurt them.
Results -   By planning ahead Jones can save himself many thousands of dollars in taxes.

When -   When an investor has used accelerated depreciation on properties such as income properties, ranches with trees or vines on which he has been able to take accelerated depreciation.
Situation -   Jones has owned a 12 unit apartment building on which he has taken accelerated depreciation. The amount of the accelerated depreciation in excess of straight line would amount to approximately $200,000. If Jones sells this property, the amount of accelerated depreciation in excess of straight line is recaptured as ordinary income. Jones wishes to take capital gains.
How -   Jones realizes that in a 1031 exchange providing he exchanges into a larger property and takes on additional debt, he can defer the recapturing of this accelerated depreciation. He enlists the aid of a knowledgeable real estate broker to exchange him out the property into another property which will give him the benefits desired and he will continue to depreciate the new property carrying his basis forward. He will not have as much depreciation, however, he realizes this.
Results -   Jones is able to move out of the property into another property giving him more benefits without recognizing any of the recapturable difference between the accelerated depreciation and straight line. (Under the 1986 tax revision, capital gains and ordinary income is paid at the same level so there would be no benefit to the above. How long this will remain the case, no one knows!)

When -   The primary reason that investors do not wish to be labeled with “dealer” is that this may preclude them from making Section 1031 tax deferred exchanges. Also, before the 1986 tax revision, dealers could not take capital gains on a real estate transaction. Under the 1986 revision, the ordinary income and the capital gains were taxed at the same rate. It is the author’s opinion, however, that this may change again shortly. For that reason, we want to be very careful about dealer transactions.
Situation -   Jones acquires a 20 acre parcel of land which he feels will be much more valuable if he splits it into 4 five acre parcels. If he does so, however, it will fall into the “dealer” category and he would be taxed accordingly. Not only that, he may be precluded from making 1031 exchanges.
How -   There are several ways that Mr. Jones can get out of the dealer situation. One would be to build on each of these parcels and retain the property as investment property. He could then show that he acquired this property for income purposes and investment purposes rather than for a dealer situation such as a fast break up and sale of individual parcels. A second way would be to split the property and then move out all four parcels at once under a land situation taking advantage of a portion of the increase in value, however, not selling off individual parcels. If Mr. Jones sells off individual parcels at a higher price this would fall into the “inventory” category and it would be a dealer situation. Also if he builds homes on the property and resells them immediately, this could make him a dealer in this particular situation. (Always check with your tax advisor.) A third way Mr. Jones could do this would be to form a “dealer corporation” which would take the property and the corporation would be retained solely for making dealer transactions keeping his other investment property “pure”.
Results -   In any of the above situations Mr. Jones would still be able to take his capital gains and be able to make Section 1031 tax deferred exchanges. This is going to become more and more important in the future under the 1986 tax revision.

When -   When a person must move out of their personal residence, perhaps in a geographical move, and the property is rented instead of sold.
Situation -   Jones receives word that he must move from his present location to Florida in order to retain his job. Houses are not selling and if he does sell, he will have to take a very low price.
How -   The IRS has not given us any concrete guidelines as to how long a property must be rented in order to qualify as investment property. I have heard very conservative accountants indicate that you should rent the property at least two years before it would be considered income property, others indicate at least 6 months. In some events, I have seen people rent their personal residence for two months and then turn around and exchange it under a Section 1031 tax deferred exchange. Whether that would stand up in court or not I do not know. If it is your intent to turn your primary residence which you have lived in for sometime into Section 1031 property, it is a good idea to build up as much evidence on your side that you are planning on retaining the property as an investment. Such things as placing an ad for rents and perhaps either renting or leasing the property for a length of time will add to your intention. One must remember when doing this, however, that your basis in the property will be whatever your basis was in your primary residence. You will not be able to increase that basis just by turning it into a rental property. When you obtain your new principal residence, that will be the replacement and if it is a more expensive house than your basis was in the other one, you will have no tax to pay on the replacement.
Results -   You would have no tax to pay on the replacement of your primary residence and you would be able to then make a tax deferred exchange on your old residence as income property. (Discuss this situation with your accountant. Always keep in mind that if your exchange is disallowed, the only difference is that you would have the same tax to pay plus a penalty.)

When -   When a client moves away from a property on which they would take either a sale or exchange for property where they plan on living.
Situation -   Jones moves from Michigan to California. He has had his small farm on the market for sale for two years but has not been able to find a buyer. He finally makes the move anyway and wishes to either sell the farm and take the cash or move his equity to California.
How -   He lists the property with a real estate exchange specialist who then contacts a broker in Michigan to see if he would be interested in working on the property under a sale situation. He makes arrangements with the broker in Michigan that if he sells the property he would receive 80% of the commission and the exchange broker would receive 20%. In the meantime if the exchange broker would make the exchange, he would receive 80% of the commission and the selling broker would receive 20% for his time and trouble.
Results -   The transaction is made either through a sale or an exchange and the owner, Jones, has the best of both worlds. (The author has worked in this way and has found it to be very satisfactory for all parties concerned.)

When -   When you have a good size installment sale note which will be paying off shortly triggering a large tax.
Situation -   Jones sold a property five years ago and carried back a $60,000 note and deed of trust. The note was payable interest only all due in five years. Within the next six months, the five year period will be coming up and Jones will receive a payoff triggering the large tax.
How -   Jones realized that if he trades the note for real estate or some other property, it will trigger the tax the same as a payoff would. He also realizes that there are buyers of notes around who are willing to purchase notes at a discount. He finds such a buyer who will buy his note paying him $30,000 discounting it. In the meantime, Jones finds another party who has a $60,000 note that he is able to purchase for $30,000. He makes sure that he has the other note to purchase, however, before he arranges to sell his original note. He then sells his note at a discount and purchases another note at a discount.
Results -   Jones would trigger the tax on $30,000 and not on the $60,000 he would have under the payoff. In the meantime, the other note he acquired, which may not be exactly the same amount, will continue giving him the same benefits as his original note, however, he will have saved the taxes on $30,000 of the payoff. He will of course have to pay that as he receives his principal but it will be spread out over a period of time.

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